Best of the best

International 'manager of managers' funds are team effort

(This is an update of a version published earlier to correct the name of the fund managed by Federico Laffan. The fund is American Century International Opportunities.)

LOS ANGELES (MarketWatch) -- They say two heads are better than one. But for some international funds, several more heads can work out better still.

Bucking the makeup of a traditional international fund, in which one or two investment advisers call the shots, these so-called "manager of managers" funds have several managers or subadvisers from different companies helping to make stock selections.

Funds such as Laudus International MarketMasters Fund
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or Managers International Equity
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use a team of hand-picked managers from a swath of foreign funds. One distinct advantage for investors: these funds sometimes offer access to top managers whose own international funds may have already closed to new investors.

Gregg Wolper, senior fund analyst at investment researcher Morningstar, Inc., said there's another perk for investors who want to take this route: the natural diversification that comes with a multimanager fund.

"You usually have a large variety of styles (in a multimanager fund), so if large growth is out of favor, you'll still have a manager or several managers in that fund that will be in other areas that are in favor," Wolper said.

On the downside, he said the best manager on the team might be one who investors would prefer run the entire fund. "It's the idea that any particular manager gets diluted in a manager of managers fund, and you are dependent on the overall adviser who is choosing these managers for the quality of that menu."

Wolper added that investors should judge multimanager funds the same as any other international funds, looking closely at expenses. And while access to top-quality managers can be a bonus, he said these funds "are not inherently better or worse than a conventional international fund with just one manager."

"They vary tremendously on the quality of managers, types of managers, focus of managers. It depends on the lineup and the quality of those managers in that lineup," said Wolper.

How they work

The manager of managers funds have a varying number of investment professionals looking after the fund's selections, specializing in a range of asset classes, regions and sizes. Usually, the fund is run by one person or a team who select managers for the fund that meet certain criteria.

Laudus International MarketMasters has four different managers advising: Mark Yockey of Artisan International
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; David Herro of Oakmark International
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; George Greig of the closed William Blair International Growth
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; and Federico Laffan of American Century International Opportunities
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also closed.

"Our job is to select, monitor and provide allocation to each of these subadvisers, tilting the portfolio and doing economic analysis to try and figure out what styles will be in favor, while pulling money from or not allocating money to advisers who will be facing headwinds," said Jeff Mortimer, who oversees the Laudus fund.

Mortimer said performance is only one of the factors considered in the overall evaluation of manager skills, and not necessarily the most important or the starting point. Other criteria include how a manager might perform in various environments, manager tenure and depths of analyst teams.

He said the fund is broadly diversified, holding about 400 foreign stocks. "For us, because the fund has four subadvisers, we can jump a little bit from boat to boat so the fund can morph. It's more than a typical international fund. It can be 'growthier' one year and more 'blendy' the next."

Mortimer said many investors use the Laudus fund as a core holding in their international portfolio, "then they may satellite around that with other emerging-markets funds or small-cap funds."

The long haul

Tom Hoffman, chief investment officer for Managers International Equity fund, said multimanager funds are not designed to chase "hot money" and may disappoint investors who go looking for that.

Rather, he said, they're for the investor "who wants to perform well in the long term and doesn't necessarily need to have a hot dot ... the best international equity fund over any short period of time, by definition, won't be that."

Hoffman said such a performance would require the three managers who advise on the Managers fund to be at the top of the market at the same time. "We selected them using different approaches," he said.

"The same thing is unlikely on the downside. It's unlikely for this fund to ever be at the bottom of the pile. Over the long term, if we have selected managers correctly and they're all adding value, then it will add value over the long term," he said.

He added that investors should be clear that the managers don't work as a team, but each work independently with a "particularly different investment philosophy." Managers' investment advisers are William Holzer and a team of associates at Lazard Asset Management, Kevin Simms of Alliance Bernstein and Jean-Marc Berteaux and Andrew Offit at Wellington Management.

SunAmerica's Focus International Equity
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also has three managers making stock picks. Steve Schoepke, vice president of research and product development at SunAmerica, said that number works well for them and helps to avoid "overlap, diluted performances and approaches" that can result from too many managers.

The fund's managers include David Herro of Oakmark, Stacey Navin, Manraj Sekhon at Henderson Global Investors and James Gendelman at Marsico International Opportunities
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"We recognize it's hard to benefit from diversification and as such, with the multimanaged approach, we're able to pick managers who are distinctive with the international equity arena," Schoepke said.

That helps mitigate risk and capture markets at different phases, he said. "So you may have a value situation, a growth situation, a little of both -- those three managers are in a position to be there for each of those positions."

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